What Are My 401(k) Distribution Options?

If you’re changing jobs or retiring, one of the most important decisions you may face is how to handle the money you’ve worked hard to earn and save in your employer-sponsored retirement plans such as 401(k)s, 403(b)s or governmental 457s. When leaving a company, you generally have four options for your 401(k) savings. Each of these options has advantages and disadvantages and the one that is best depends upon your individual circumstances. You should consider features such as investment choices, fees and expenses, and services offered. Your Wells Fargo professional can help educate you regarding your choices so you can decide which one makes the most sense for your specific situation. Be sure to speak with your current retirement plan administrator and tax professional before taking any action.

Decide which option is right for you:

Rolling your money to an IRA allows your assets to continue their tax-advantaged status and growth potential, the same as in your employer's plan. In addition, an IRA often gives you access to more investment options than are typically available in an employer's plan as well as investment advice. An IRA lets you decide how you want to manage your investments, whether that's using an online account with which you can choose investments on your own or working with a professional who can help you choose investments.

Features

Investments retain tax-favored growth potential.

Access to a variety of investment choices, which provide greater potential diversification.

Ability to maintain your retirement savings along with your other financial accounts.

Traditional and Roth IRA contributions and earnings are protected from creditors in federal bankruptcy proceedings to a maximum limit of $1 million, adjusted periodically for inflation.

Rollovers from qualified plans, SEP, and SIMPLE IRAs have no maximum limit for federal bankruptcy protection.

Keep in mind

IRA fees and expenses are generally higher than those in your employer’s retirement plan and depend primarily on your investment choices.

Required minimum distributions (RMDs) begin April 1 following the year you reach 70½, and annually thereafter. The aggregated amount of your RMDs can be taken from any of your Traditional, SEP, or SIMPLE IRAs. Roth IRA owners have no RMDs.

IRAs are subject to state creditor laws regarding malpractice, divorce, creditors outside of bankruptcy, or other types of lawsuits.

If you own appreciated employer securities, favorable tax treatment of net unrealized appreciation (NUA) is lost if rolled into an IRA.

In addition to ordinary income tax, distributions prior to age 59½ may be subject to a 10% IRS tax penalty.

Note: If you choose this option, you’ll want to research the different types of accounts and where you would like to open an IRA, start the process of moving your savings over to your new IRA, periodically review your investments, and take RMDs (once you reach age 70 1/2).

While this approach requires nothing of you in the short term, managing multiple retirement accounts can be cumbersome and confusing in the long run. And, you will continue to be subject to the plan’s rules regarding investment choices, distribution options, and loan availability. If you choose to leave your savings with your former employer, remember to periodically review your investments and carefully track associated account documents and information.

Features

No immediate action required of you.

Assets retain their tax-favored growth potential.

You typically have the ability to leave your savings in their current investments.

Fees and expenses are generally lower in an employer sponsored plan and you will continue to have access to those investments. Please contact your plan administrator for details.

You avoid the 10% IRS tax penalty on distributions from the plan if you leave the company in the year you turn age 55 or older (age 50 or older for certain public safety employees).

Employer securities (company stock) in your plan may have increased in value. The difference between the price you paid (cost basis) and the stock’s increased price is NUA. Favorable tax treatment may be available for appreciated employer securities owned in the plan.

Keep in mind

Your former employer may not allow you to keep your assets in the plan.

You must maintain a relationship with your former employer, possibly for decades.

Former employer’s plan will determine:

When and how you access your retirement savings.

Which investment options are available to you.

Additional contributions generally not allowed.

RMDs, from your former employer’s plan, must be taken by April 1 following the year you reach age 70 ½ and continue annually thereafter, to avoid IRS penalties.

In addition to ordinary income tax, distributions prior to age 59½ may be subject to a 10% IRS tax penalty.

RMDs must be taken from each employer-sponsored plan including plan Roth accounts; aggregation is not allowed.

Not all employer-sponsored plans have bankruptcy and creditor protection under ERISA.

If you choose this option, remember to periodically review your investments, carefully track associated paperwork and documents, and take RMDs (once you reach age 70½) from each of your retirement accounts.

If you’re joining a new company, moving your retirement savings directly into your new employer’s plan may be an option. This option may be appropriate if you’d like to keep your retirement savings together, and if you’re satisfied with investment choices offered by your new employer’s plan. This alternative shares many of the same features and considerations of leaving your money with your former employer.

Features

Assets retain their tax-advantaged growth potential.

Retirement savings kept in one account.

Fees and expenses are generally lower in an employer sponsored plan and you will have access to those investments. Please contact your plan administrator for details.

You avoid the 10% IRS tax penalty on distributions from the plan if you leave the company in the year you turn age 55 or older (age 50 or older for certain public safety employees).

RMDs may be deferred beyond age 70 ½ if the plan allows, you are still employed and not a 5% or more owner of the company.

Generally, employer-sponsored retirement plans have bankruptcy and creditor protection under the ERISA.

Keep in mind

Option not available to everyone (eligibility determined by new employer’s plan).

Waiting period for enrolling in new employer’s plan may apply.

New employer’s plan will determine:

When and how you access your retirement savings.

Which investment options are available to you.

You can transfer or roll over only plan assets that your new employer permits.

Favorable tax treatment of appreciated employer securities is lost if moved into another retirement plan.

Note: If you choose this option, make sure your new employer will accept a transfer from your old plan, and then contact the new plan provider to get the process started. Also, remember to periodically review your investments, and carefully track associated paperwork and documents. There may be no RMDs from employer retirement plans for those still working there.

Withdraw your money as cash

While the option of withdrawing all your money at once may sound attractive at first, carefully consider the financial consequences before making such a decision. The money you withdraw will be taxable, and as such, subject to a mandatory 20% federal tax withholding. In addition, the money is also subject to a potential 10% IRS tax penalty. If you absolutely must access the money, you may want to consider withdrawing only what you need until you can find other sources of cash. Before making this choice, use our online early-withdrawal costs calculator.

Features

You have immediate access to your retirement money and can use it however you wish.

Although distributions from the plan are subject to ordinary income taxes, penalty-free distributions can be taken if you turn:

Age 55 or older in the year you leave your company.

Age 50 or older in the year you stop working as a public safety employee (certain local, state or federal) — such as a police officer, firefighter, emergency medical technician, or air traffic controller — and are taking distributions from a governmental defined benefit pension or governmental defined contribution plan. Check with plan administrator to see if you are eligible. Lump-sum distribution of appreciated employer securities may qualify for favorable tax treatment of NUA.

Keep in mind

Your former employer is required to withhold 20% for the IRS.

The distribution may be subject to federal, state, and local taxes unless rolled over to an IRA or another employer plan within 60 days.

Funds lose tax-advantaged growth potential.

Retirement may be delayed, or the amount you’ll have to live on later may be reduced.

If you leave your company before the year you turn 55 (or age 50 for public safety employees), you may owe a 10% IRS tax penalty on the distribution.

Note: If you must choose this option, you may want to consider withdrawing only a portion of your savings, while keeping the remainder saved in a tax-favored account, such as an IRA. This can help reduce your tax liability, while growing some of your savings for retirement at the same time.

Taking cash can be costly

Here’s an example of what may be left of a $20,000 balance if you withdraw your money as cash:

Current Balance

$20,000

10% IRS early-withdrawal penalty*

- $2,000

Regular federal income tax

- $5,000

State and local income taxes

- $1,000

Total savings reduced to:

$12,000

*May be assessed if you are under age 59½.

For illustrative purposes only. Assumes a 25% federal tax bracket and 5% state and local tax rate. Taxes may vary. Depending on your tax bracket, the taxes owed at the end of the year may be higher or lower.

It may take a few weeks to receive your final check in the mail once requested. Remember, your final check amount will reflect the 20% automatic withholding for federal taxes and any gains or losses due to market fluctuation. You’ll want to consider how you’ll cover any additional federal taxes due, along with state taxes and the possible 10% IRS early-withdrawal penalty when filing your tax return for the year.

Withdrawals are subject to ordinary income tax and may be subject to a federal 10% penalty if taken prior to age 59½.

Investment and Insurance Products:

Are Not insured by the FDIC or any other federal government agency

Are Not deposits of or guaranteed by a Bank

May Lose Value

Information published by Wells Fargo Bank, N.A., Wells Fargo Advisors, or one of its affiliates as part of this website is published in the United States and is intended only for persons in the United States.

Retirement Professionals are registered representatives of and offer brokerage products through Wells Fargo Clearing Services, LLC (WFCS). Wells Fargo Advisors is a trade name used by WFCS and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. Discussions with Retirement Professionals may lead to a referral to affiliates including Wells Fargo Bank, N.A. WFCS and its associates may receive a financial or other benefit for this referral.

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